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Exploring Federal Pay for Cuts

As our Budget Simulator grows in popularity, more and more people have taken the spending challenge to voice how they would like to see government spending cut. One popular suggestion has been that something be done regarding federal pay and benefits, which have fared relatively well in this economy while the private sector has felt the stronger sting of the recession.

Truth be told, federal employees do quite well for the most part. In fact, a recent USA Today analysis found that in a job-to-job comparison, a typical federal employee is paid about 20% more than his private sector counterpart.

It is true that much of this difference is due to differing levels of education attainment, as Peter Orszag explains here. But in addition to high wages, federal employees receive extremely generous benefits. Among them are a very generous health care plan, life and disability insurance, two types of retirement benefits (a DB pension and a 401(k)-type plan with a match), and a significant amount of paid time off. Not to mention flexible work schedules and a level of job security unheard of in the private sector.

The gap between federal and private employees has worsened some as the recession has taken hold. Over the past two years, government wages have grown 4.5% while private wages have grown only 2.2%. Over the last year, private wage have actually fallen. In other words, government wages have maintained strength over the course of the recession, while private sector wages have suffered.

Source: Bureau of Economic Analysis, National Income and Product Accounts Table, 6.6D

One recent analysis actually found that 19% of civil servants earn salaries above $100,000 – compared to 14% before the recession. Few other industries have been so lucky. To us, this suggests that federal compensation might be an area ripe for reform.

And military compensation must be on the table as well as civilian compensation. The 2008 Quadrennial Review of Military Compensation found that service members made a larger salary than 80 percent of comparable civilians. And a Defense Department sponsored study by CAN Corp. found in 2006 that enlisted service members made over $13,000 more (including benefits) than their civilian counterparts. Officers were found to make almost $25,000 more.

To be sure, we cannot solve our debt woes just by reining in on federal wages and benefits. If the pendulum swings too far in the other direction, the quality of our federal workforce could suffer.

Still, there are a number of ways we could begin to pare back some of the generosity in federal compensation. Some of the options highlighted below could help produce savings for our fiscally-strapped government:

Policy Option

Savings (billions)

Reduce military pay raises by 1 percent for five years

$15

Calculate federal pension benefits based off five years of earnings to conform with private sector

$4

Base COLAs for federal and military pensions and veterans' benefits on alternative measures of inflation

$23

Increase federal employees' contributions to pension plans

$9

Reduce benefits under the federal employees' compensation act

$2

Freeze federal civilian pay for 1 year

$30

Freeze federal civilian pay for 3 years

$90

Base federal retirees' health benefits on length of service

$1

Adopt a voucher plan for the Federal Employees Health Benefits Program

$33

Increase health care cost sharing for family members of active-duty military personnel

$7

Introduce minimum out-of-pocket requirements under TRICARE for life

$40

Increase medical cost sharing for military retirees who are not yet eligible for Medicare

$25

Require copayments for medical care provided by the Dept. of Veterans Affairs to enrollees without a service-connected disability

Some of these options deal with pay directly. A one-year freeze on federal civilian pay (in other words, no cost of living adjustment) would save $30 billion over the next decade and restore much of the growing wage disparity resulting from the recession. We estimate a three-year pay freeze could save three times that. And simply tying basic military pay raises to 0.5 percentage points below the Employment Cost Index (the measure used for calculating wages and salaries of private-sector workers), for five years rather than 0.5 percentage points above it, could save $15 billion.

Pension benefits can also be reformed. In the private sector, where defined benefit pensions still exist, benefits tend to be based off of five years of earnings – yet public pension benefits are calculated off of three years, which does not usually capture as big of a range of earnings. Meanwhile, federal employee contributions to their pensions tend to be low, and benefits are adjusted annually based on an inaccurate measure of inflation. Correcting these issues, together, could save more than $35 billion dollars over a decade.

And then there is health care. Federal, military, and veteran health benefits are driven by the same factors as Medicare, yet were left untouched in health reform. Some reforms to the Federal Employee Health Benefits (FEHB), such as replacing it with a voucher program, could save over $30 billion. Meanwhile, introducing some cost sharing and premiums into the military TRICARE program – which hasn’t seen either rise in even nominal terms since its creation – could save over $70 billion.

Finally, there’s the matter of tax expenditures. The tax code itself subsidizes federal workers in a number of ways. For example, many benefits and allowances, and even some types of direct pay, are exempt from taxation for members of the military. The same is true for many federal workers living abroad. And veteran’s pension and disability benefits also seem to get a special place in the tax code. Taken together, these benefits will cost taxpayers about $130 billion in lost revenue over the next decade.

To be sure, even adopting every one of the policies together would still only reduce the deficit by less than $400 billion over the next decade. That isn’t nearly enough to stabilize our debt or get deficits under control. But it would be a great start, and certainly one worth considering.

Where did you get that Federal benefits are "extremely generous"? The only reason the government seems generous is because industry has managed to whittle away private sector benefits as money and power accrue to the C-level executives.

Once upon a time, like back in the 1970s, workers were assured of 40-hour weeks with overtime, 2-weeks vacation, full pensions, and protection from health care bankruptcy. Now that those are long gone, industry wants to level Federal workers to the same level they have reduced the private sector to.

Private industry has violated labor laws by classifying nearly every worker as "exempt", meaning no overtime. That designation was intended for managers and professionals like lawyers. Now it refers to secretaries and clerks. The "get it down or lose your job" mentality means that workers put in 50+ hours a week, and our guilted out of taking vacations.

In the 1990s, when private workers were doing much better, Federal workers were told that their raises were small because they do better under bad times. Now that times are bad, they are told that they are too priviledged and should sacrifice for the sake of the economy.

Instead of stripping the government of its best workers, how about we just stop paying $60 billion a year for unwinnable wars that bring us no benefit. That would save $600 billion over the next decade, and that money and our soldiers lives would stay at home, not be lost abroad.

You wrote: "The gap between federal and private employees has worsened some as the recession has taken hold. Over the past two years, government wages have grown 4.5% while private wages have grown only 2.2%. Over the last year, private wage have actually fallen. In other words, government wages have maintained strength over the course of the recession, while private sector wages have suffered."

Well, of course private pay has been stagnant. That's been by design. As I describe at Data on Income & Tax Distributions, "conservative" policies have been very effective at depressing wages. That's the problem. There are complaints about being "taxed too much", but the real problem is that people are "paid too little".

Compensation has not kept pace with productivity. In 2004 compensation would have been 68% higher had compensation growth kept up with productivity growth.

So-called "conservative" ecnomic policies have put the path dependence dynamic on steroids. Here are some of them:

* Reductions in income tax rates for the wealthy. * Taxes on capital gains and dividends at 15%, but a top income tax rate at 35%; this penalizes returns from working for a wage compared to returns from investment and speculation. * Social Security taxes on every wage dollar earned, starting with the very first dollar (no deduction) and then having that money spent to provide tax cuts for the wealthy. See David Cay Johnston on tax cuts for the very, very wealthy were paid for by increasing Social Security taxes: "How the 2003 Bush Tax Cuts were paid for." o Reagan increased the SS tax by 77 percent to, ostensibly, finance not only current retirees, but also pay in advance for future retirements. They planned for the baby boom ... or told the lie that they were doing so. o Reagan went on to spend the SS dollars collected and provide tax cuts for the very wealthy. SS is only in trouble because "conservatives" (of both parties) are thieves. o Alan Simpson, on Obama's Social Security commission, however sees Americans on Social Security, the victims of this theft, as the "lesser people". See his outrageous & ignorant comments. * Tax breaks that let corporations largely avoid taxes. * National policy by the Federal Reserve that assures more people than jobs to depress wages ... note the Fed is a private corporation owned and run by banks, not government. * Offshoring of jobs (low-wage, low-tech, & high-tech) that put Americans in competition with extremely low-wage & slave labor, which drives down wages at the bottom, but provides obscene rewards to the executives that destroy (rather than create) jobs. * Higher "fees" for many public services that disproportionately affect those with lower incomes. * Higher local and state sales taxes that also disproportionately affect those with lower incomes. * The inevitable and natural "path dependence" structure described above this section on my page drives the "rich get richer & the poor get poorer" dynamic. Progressive taxation is necessary to prevent this runaway dynamic from driving most of the population into poverty.

The U.S. economy is in trouble because the depressed wages increased borrowing, which is now over as so many have lost their jobs and given the Fed-created housing bubble has burst. Consumer demand has collapsed and there will be no investment in the absence of demand no matter how much taxes are reduced for corporations and the wealthy.

This must be reversed. Federal wages should not be lowered, "conservative" manipulation to depress wages must stop in order that private wages increase.

The unfunded federal pensions and health care are 99 trillon dollars. (Dallas Federal Reserve May 25,2009) This is more than Medicare and Social Security's unfunded combined. The bleeding has to stop - all of the above needs to be done and new hires need a defined contribution plan. Ireland has reduced government salaries from 5 to 15%. Why can't we?

Gov't workers can stop paying student loans after ten years while the private sector must pay for 25 years before anything is forgiven. The wild gravy train must stop!

I'm uniquely qualified to provide anecdotal evidence on federal employee pay and benefits because I spent 8 years in the military, 20 years in private industry, and the past year as a feeral employee. While some federal employees may be overpaid compared to their private industry counterparts (particularly non-degreed clerical workers), in my experience managerial and professional employees (scientists, engineers, attorneys, etc) are underpaid relative to their private industry counterparts. I took a slight pay cut (about 5%)when I came to the federal government. BUT I also took a job with much, much more responsibility (I was a non-supervisory project manager in private industry...I now supervise a division with 16 employees, most of whom have advanced degrees) If I had a similar job in private industry, I would be making 20-30% more than I currently make. The irony of all of this is that the reason I was able to get a job that I did not have great qualifications for (never supervised more than 2 people in my previous career in private industry) is that anyone from outside the government who was truly qualified for the position based on prior experience as a manager at this level would not have taken the job...because the pay is too low!

Re: benefits...much of the confusion comes from the fact that old CSRS system employees had a much better retirement plan than current federal employees. My experience is that the benefits on the whole are not much better than the average small business I've worked for. The Fortune 500 company I worked for had much, much better benefits than the federal government. Of course, some private industry jobs have few or no benefits, particulalry if the job is relatively low skilled. Employers who can get away with not offering 401k or health benefits will do that...but if their workforce is highly skilled (engineers, scientists, etc) they will not be able to recruit good employees without offering a decent benefit package. As a result, most of the fed employees who work for me could do well in private industry...could probably make more money. The reasons they stay on their current job are the job security (which is apparently not as great as we thought...furloughs may change that) and the fact that they like what they do.